JuntoBlog

The $5 Million Question: When Does a Growing Company Need to Hire a New CEO or COO?

Last week, I discovered an important pattern for us at Junto: companies that passed the $5 million revenue mark had a need for an experienced CEO or COO to help run the company.

Out of 26 total companies (20 Alumni and 6 current Apprentices), eight of them either had $5 million in revenue when they enrolled in Junto, or surpassed that point after enrolling. Four of those have hired a seasoned CEO or COO (who, in some cases, didn't work out). And based on my intimate knowledge of the remaining four, I believe that each has a need for deep experience on their leadership team (as I do for a ninth company that is approaching the $5 million mark).

Of the four companies that did hire an outside executive, none were forced to by their investors, so it was an intentional choice by the founder(s). And of the other four that, in my opinion, could use seasoned leadership, three have a fair number of investors. They're all performing well as businesses and, as far as I know, aren't being asked by the investors or board members to bring in experienced C-level talent.

There are two reasons I call all of this an "important" pattern for us, and why it can benefit other growth-stage companies.

First, it provides additional and encouraging - yet limited - support of a hypothesis we had when Junto was designed: that many companies outgrow the capabilities of first-time founders. But because founder-led companies are believed to outperform others, it's in the best interests of the business if the founders can grow and develop into effective leaders rather than bring in executives to run the company. Therefore, we further hypothesized that if there was a way to accelerate that growth, it could help keep the founders in place to produce higher performance (that one continues to be validated based on anecdotal feedback, survival rates, and financial results of the companies).

Second, it helps us better understand and serve our market which we partly identify as companies between $1 million and $10 million in revenues. The upper end of that range was based on my prior experience, as well as many conversations with seasoned entrepreneurs and investors over the years. The conclusion was that the $10 million revenue mark (give or take a few million based on industry, market, growth rate, etc.) is often when companies bring in "professional management" to run the business.

Because it obviously takes a while for a company to begin thinking about hiring an outside CEO or COO, engage the recruitment and selection process, onboard and integrate the executive, and begin seeing results, perhaps it's in the best interests of the company to start this process well before it gets to $10 million.

If that's the case, then we can bring up this experience and belief at the $5 million mark so that the company is in better position if and when it approaches $10 million. And while our data is not scientifically sound nor is the conclusion based on research (but rather on intimate knowledge and long-term observation), it's a pattern worth sharing with companies that grow into the mid-seven digit range so that they are aware of what could occur.